Q4 High-Yield Wrap: Issuance spirals lower, even as investors tiptoe back to risk

Though the high-yield marketplace pulled out of a nosedive in November, participants expect more turbulence before the sector can regain cruising altitude. Issuance has totaled just $15.4 billion in the fourth quarter, versus $70.2 billion for the same quarter last year, and $96 billion in the final quarter of 2020, according to LCD.

Since the Global Financial Crisis, the only lower quarterly total was in the fourth quarter of 2018, when risk tolerances were similarly on a knife’s edge in the face of recession risks. That total was only marginally lower, at $14.9 billion.

          

While the slowdown at the tail end of 2018 marked a transitory lull in activity, the latest quarter has only extended a grueling dry spell. December’s $2.3 billion issuance total has marked an eighth consecutive month of single-digit issuance. Issuance reached double digits just twice this year, in January ($24 billion) and April ($11 billion).

Despite a stirring of activity in November, when issuance reached a second-half high at $9.2 billion, the six-month rolling issuance sum of issuance continued to a new post-GFC low at $34 billion through December, down from $68 billion through June and $178 billion over the final six months of 2021. The all-time high remains the $286 billion deluge over the first six months of 2021.

Further, high-yield didn’t join the relative bounce in institutional loan volume, which has increased to $35 billion in the fourth quarter, from $22 billion over the previous three months. Loan volume has now run ahead of high-yield issuance for eight straight quarters, after loans lagged high-yield volume in the pandemic-afflicted 2Q20-4Q20, amid the mad scramble among issuers to lock in low fixed rates.

For the year, high-yield issuance of $102 billion is down 78% from 2021’s record $465 billion total, which built on the second-highest all-time total of $435 billion in 2020. This year's issuance tops 2008’s crisis-era $68 billion annual amount — the low water mark for any year for LCD records since 2005 — but it substantially trails the $164 billion placed during the recession-blighted 2009.

Still, while the high-yield asset class has suffered its biggest losses this year since 2008, it could have been worse. Investors put nearly $16 billion to work in US high-yield bond funds over the first 10 weeks of the fourth quarter, after they pulled more than $42 billion from the funds over the first nine months this year.

As investors moved in from the sidelines, and as Treasury prices gained ground, the price for the S&P US High Yield Bond Index to start December hit its highs for the quarter, at 88% of par. The index yield to worst, at roughly 8.50% (T+418), had eased from a 2022 peak at 9.46% on Oct. 21 (T+465), and the 8.62% level on June 30 (T+542). However, it remained elevated versus quarter-end readings at 5.94% on March 31 (T+326), 4.22% on Dec. 31, 2021 (T+299), and a sub-4% yield on Sept. 30, 2021 (T+302).

The recovery in risk premiums during the quarter, albeit tentative, left the index carrying a loss of roughly 10% for the year as of mid-December, which compares with losses of more than 17% for the year ahead of the market pivot over the back half of October. Still, the worst year for the index over the trailing decade produced an annual loss of 4%, in 2015.

Meantime, the average bid for LCD’s 15-bond sample of high-yield flow name issues advanced more than six percentage points for the quarter to Dec. 8, to 88.31% of par, from a 2022 low at 82.07 at the end of September.

Emblematic of the market’s mixed messaging was a $300 million senior offering priced on Dec. 8 for Jones DesLauriers Insurance Management, backing the refinancing of bank debt and higher liquidity ahead of potential acquisitions. The CCC/Caa2/CCC+ unsecured deal represents a rare green shoot for the scarred primary landscape, as it marked the first triple-C new issue since June. The deal snapped the longest dry spell for triple-C supply since two straight full quarters without CCC issuance in the six months to March 2009, according to LCD.

That liquidity did not come cheap, though. Jones printed the notes with a 10.5% coupon, priced at an OID of 97.384% of par to yield 11%, or the high end of both formal price talk and early whispers.

Jones was not alone in facing down high costs. The average yield at issuance for deals in the fourth quarter swelled to 10.4% (10.9% for secured bonds, and 10.1% for unsecured bonds), which marks the first double-digit average for any quarter since 2009. That reflects a doubling of yields from the all-time low at 5.11% in the third quarter of 2021, with quarterly averages rising over each of the five subsequent quarters, including a 7.85% average in the third quarter this year.

Across the 18 new-issue tranches completed in the fourth quarter, nine other issuers joined Jones in paying double-digit clearing yields, across placements for Bluewater Holding (15.3%), AMC Entertainment (15.066%), Dish Network (12.25%), Rakuten (12%), EnQuest (12%), Sabre GLBL (11.75%), Enerflex (11.50%), Nielsen (11%), and Carnival Corp. (10.75%).

Refinancing activity plunged this year, both on a gross basis and as a share of total issuance, reflecting both prohibitive costs and the aggressive liability management exercises completed through the low-cost quarters during the pandemic. Deals primarily placed to refinance existing debt slipped to $49 billion this year, from more than $290 billion in each of the previous two years. This year’s total was less than half of total issuance volume, versus annual shares of 62-68% in each of the six previous years.

Issuance increasingly skewed to shorter maturities over the back half of this year, as borrowing costs inflated.

As refinancing efforts declined, M&A volume accounted for more than 35% of total issuance this year, a high share for the carve-out since the acquisition frenzy in 2015, when M&A-driven issuance accounted for 38% of total new supply.

Featured image by jamesteohart/Shutterstock

This article originally appeared on PitchBook News